Editorial: Revisionists point fingers at Fannie, Freddie

In 2008, as the worst financial crisis since the Great Depression erupted on the eve of a presidential election, a few contrarians sought to convince the public that the accepted narrative about the crisis — that it was primarily the result of greed on Wall Street and lax oversight in Washington — was wrong.

By Pablo Martinez Monsivais, AP

Financial commission: Fannie and Freddie "contributed to the crisis, but were not a primary cause."

Sponsored Links

Instead, they argued, it could be pinned on a combination of mortgage giants Fannie Mae and Freddie Mac and misguided housing policies.

The argument never gained much traction at the time. And, after an exhaustive 15-month inquiry, a commission chosen to find causes of the crisis cited a raft of factors, including "dramatic breakdowns of corporate governance, profound lapses in regulatory oversight, and near fatal flaws in our financial system."

But now the alternative narrative is back. This time, it is being made in various forms by people ranging from Republican presidential candidate Newt Gingrich to moderate (albeit pro-Wall Street) New York Mayor Michael Bloomberg. A central argument made by many of these new contrarians is that liberal Democrats in Congress were so hell-bent on getting low-income people to buy homes — at the behest of Fannie, Freddie and the rest of the real estate lobby — that they encouraged lax lending.

USATODAY OPINION

About Editorials/Debate

Opinions expressed in USA TODAY's editorials are decided by its Editorial Board, a demographically and ideologically diverse group that is separate from USA TODAY's news staff.

Most editorials are accompanied by an opposing view — a unique USA TODAY feature that allows readers to reach conclusions based on both sides of an argument rather than just the Editorial Board's point of view.

Like most revisionist history, the argument has elements of truth. The administrations of Bill Clinton and George W. Bush both promoted expansion of homeownership, setting the stage for the looser mortgage standards that were taken to an extreme by sleazy subprime lenders. But the revisionist argument falls short in at least two major regards.

First, while Fannie and Freddie are unique to the United States, housing bubbles are not. In fact, the years 2000 to 2007 saw a remarkable run-up in home prices in a broad range of countries, with subsequent busts in many. Fannie and Freddie's impact here might be debatable, but it's hard to argue they had much impact in say, Ireland.

Second, Fannie and Freddie were late to the subprime party. In 2003, they dominated the housing market much as they do now, purchasing nearly 70% of all new mortgages, most of which were of high quality. Within three years, however, their market share had dropped to 40% as the result of a surge in subprime and "no-doc" loans issued by non-bank lenders and securitized by Wall Street.

As the Financial Crisis Inquiry Commission said about Fannie and Freddie: "These two entities contributed to the crisis, but were not a primary cause. … They followed rather than led Wall Street and other lenders in the rush for fool's gold."

But for all that is wrong about Fannie and Freddie, they were not the main reason for the financial crisis. Instead, they are a convenient red herring for politicians trying to shift blame and for Wall Street interests trying to fight off new regulations.

For more information about reprints & permissions, visit our FAQ's. To report corrections and clarifications, contact Standards Editor Brent Jones. For publication consideration in the newspaper, send comments to letters@usatoday.com. Include name, phone number, city and state for verification. To view our corrections, go to corrections.usatoday.com.